Lloyd’s Economist Analysis of 2008 Finds “Instability”

January 9, 2008

A research study, commissioned by Lloyd’s and the Economist Intelligence Unit in 2007, found that “54 percent of business leaders felt that the risk to their company of political violence and terrorist activity would increase over the next five years.”

Recent events would seem to support that analysis, as violence in Kenya and Pakistan focus attention on emerging markets.

“Kenya has been shaken by violent riots following the contested elections on 27 December,” Lloyd’s explained. “In recent years, Kenya has been seen as a beacon of stability in a volatile region, but what 2008 holds for the country is now uncertain.”

The bulletin on the Lloyd’s web site (www.lloyds.com) also explained: “Overall, 2007 was a watershed year for investment in Africa. The international investment community invested around $592 million across the continent in the first six months of the year alone. The current uncertainty undoubtedly has the potential to harm Kenya’s reputation as one of Africa’s most stable markets.”

Beazley underwriter Adrian Lewers warned: “If this continues for more than a few weeks, Kenya’s business environment could experience serious disruption and perhaps a loss of confidence among investors”.

In the short term, overseas companies operating in Kenya will undoubtedly focus on improving security measures for property and staff, but some commentators fear that long-term violence could allow destabilizing influences linked to terrorism in Sudan and the north-east to gain a dangerous foothold in the country. Lewers pointed to “Kenya’s important role as the region’s most developed economy.” He indicated that it’s “likely that a period of prolonged instability in Kenya will affect regional economies such as Rwanda, Burundi, Ethiopia, Uganda and the Democratic Republic of Congo, and could affect investor perceptions of the wider region.”

The violence in Pakistan, following the assassination of Pakistani People’s Party (PPP) leader and former President of Pakistan Benazir Bhutto on 27 December, have also heightened concerns. “Western governments are keenly watching events unfold, hoping that the situation will not result in further civil unrest, which could have a major effect on global stability,” said Lloyd’s. “Indeed, 33 percent of business leaders, according to Lloyd’s research, think riots, demonstrations or social unrest present the highest risk to their company’s operations.

“In financial terms, riots across Pakistan have caused millions of dollars worth of damage, including over 200 million to the railways alone. The stock market has plunged and there has been a massive drop in the value of the local currency. These are likely to rally quickly, and the Pakistani economy has been relatively strong in recent years, not least due to aid and investment from the US and a flourishing Karachi stock exchange.”

The recent events, however, have clouded the future. Ian Bremmer of the risk advisory and consulting firm Eurasia noted: “Pakistan, one of the largest ‘frontier’ emerging markets, is becoming riskier from a political standpoint.”

Hopes now seem to rest on a “speedy and fair election,” Lloyd’s continued. “Many believe that the best outcome for Pakistan generally, for national and foreign business in the region and for global stability would be a legitimate, civilian-led, military-backed government, although the likelihood if this happening is diminishing daily.”

Jennifer Harbison, Head of Desk, Asia at Control Risk, the independent risk consultancy commented: “A governing arrangement that allows for cooperation among the power ‘troika’—the president, the prime minister and the army chief—offers the best hope of political stability, an effective security policy and sustainable good governance. However, the prospects for such an arrangement—never great—have diminished significantly since the assassination of Benazir Bhutto, which has further soured relations between the political parties and the government establishment.”

Lloyd’s asks rhetorically: “How will the rest of the year play out? And concludes that the events in Pakistan and Kenya “highlight the unpredictability of the threat of terrorism and political violence, and the need for global business to be informed and prepared.”

Lloyd’s also indicated that its “research shows that many business leaders are not yet fully using the resources available to them to help evaluate and understand emerging market risks, with only 39 percent of global businesses actively using information from employees on the ground to help structure their risk management strategy, and only 20 percent working with private sector risk and security analysts, while two thirds rely on international media reports.

“Most observers thought that the Kenyan elections would result in a relatively smooth and democratic process, and so the extreme violence and ethnic unrest that has occurred was – for many – unpredicted and unexpected. On the other hand, the elections in Pakistan were always expected to be fraught and controversial, even if the cruel way events have unfolded have shocked the world.

“The year ahead, with elections planned across the globe from Washington to Moscow, is sure to bring much political change. The best advice to business leaders in 2008 must be to seek advice from risk and security professionals to prepare for predictable events, while remembering at the same time to be ready to expect – and to respond to – the unexpected.”

Source: Lloyd’s

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